Daily analysis 21.11.2014

Thursday's solid US data didn't push the EUR/USD lower, but the pair slided after dovish Draghi comments. Japanese deputy prime minister on too fast yen depreciation. Has the SNB already intervened on Swiss franc? Belka, Zielinska-Glebocka, and Osiatynski on monetary policy. The zloty below 4.21 per the euro after the ECB chief comments

The data. Draghi. Japan. Franc

On Thursday we received a solid portion of data. Most of them where either better than expectations or in line with estimates. The special attention regarding monetary policy was placed on inflation, which was higher than majority of economists predicted (+1.7% y/y). Despite that the Federal Reserve prefers other index describing prices (PCE) both inflation measures are highly correlated and it is definitely an argument against longer monetary accommodation.

The dollar, however, wasn't that eager to strengthen. It might be a result of high valuation toward yen. It is also possible that some big players wanted to extend the correction on the EUR/USD and didn't want to allow the pair to slide to much just after the surprising data hit the wires.

This attempt might have been unsuccessful due to dovish comments from Mario Draghi today. The ECB chief during Frankfurt European Banking Congress said that “we will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us” Moreover he also claims that “if on its current trajectory our policy is not effective to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace composition of our purchase”.

Draghi's remarks not only sounded like there is QE on “the table”, which may increase the central bank balance sheet by 1 trillion euro. It could also mean the the ECB is even ready to push asset purchases further. It is also interesting that “Super Mario” was pretty direct concerning the exchange rate. He said that “there is evidence that both the various Large Scale Asset Pruchase programmes of the Fed as well as the Bank of Japan's Quantitative and Qualitative Easing Programme led to a significant deprecation of their respective exchange rates”. Draghi's comments pushed the EUR/USD below 1.2450 and currently it would be really hard to generate any substantial correction.

On the yen market we are observing - long anticipated by many - correction. Partly it is the effect of comments from Japanese deputy prime minister. Taro Aso said that “Over the past week yen-dollar rate has weakened too fast – that's clear”. Authorities from Tokyo often suggested that they want a weaker local currency but the pace of depreciation should not be rapid. From market point of view Aso's comments haven't changed much. The yen should still be under pressure and it may only generate a relatively short-lived correction or pause the trend for some time.

It is getting more and more interesting on Swiss franc. Yesterday UBS suggested according to Bloomberg, that trades are unwilling to buy the euro against the franc “because the tail risk of the floor breaking is looming too large”. It is an interesting comment especially that none of the major investment banks assume that the floor might be breached. In the same report UBS also claims that “negative deposit rates might be the only way out of the situation”.

There is also a rumour spreading around investors that SNB has already started buying euro. During the dovish Mario Draghi speech when the single currency was weakening to most counterparts the euro-swiss was climbing. First data concerning hypothetical purchases may be seen on Monday when the SNB publishes data on deposits. If it turns out that the Swiss central bank has already intervened we should stay around at least 20-30 pips above the threshold.

Summarizing, the Mario Draghi speech set the tone on the EUR/USD probably not only till the day's end but further into the next week. In current conditions it will be really hard to generate a major rebound and there is much higher probability that we may drop toward 1.23 than rise to 1.25.

No direction

On Thursday three comments from MPC members hit the wires. Belka's interview in “The Wall Street Journal” shows that the central bank chief is ready to lower the rates to fulfill the central bank inflation target. It also confirms the view that during the recent meeting he was outvoted by hawks.

On the other hand, speaking to PAP Alicja Zielinska Glebocka didn't want to reveal her preferences regarding future voting, but her concerns on deflation and growth uncertainty should be enough to push her for the small cut.

There are no doubts on professor Osiatynski view. The dovish MPC member claims that due to a low inflation and significant rate difference between Poland and the euro area the cut is warranted. Moreover the economy needs cheaper financing to boost private investments

Despite the fact that all cited monetary policy makers (plus Bratkowski) would like to ease credit conditions doves are still not getting majority. To push the cut through the “yes” vote is needed either from Hausner or Chojna-Duch. As a result their comments will be crucial in following days.

The zloty was clearly boosted by dovish Draghi comments. Increasing probability for QE in the euro area is a strong argument for the PLN. Currently we have started testing the 4.20 level to the common currency and dropped below 3.50 on the franc. It will be hard to breach the technical support today but more stimulus signals from the ECB can push the EUR/PLN and the CHF/PLN toward 4.15-4.18 and 3.45-3.48 respectively.

Expected levels of PLN according to the EUR/USD rate:

Range EUR/USD

1.2450-1.2550

1.2350-1.2450

1.2550-1.2650

Range EUR/PLN

4.2000-4.2400

4.2000-4.2400

4.2000-4.2400

Range USD/PLN

3.3600-3.4000

3.3800-3.4200

3.3400-3.3800

Range CHF/PLN

3.4800-3.5200

3.4800-3.5200

3.4800-3.5200

Expected GBP/PLN levels according to the GBP/PLN rate:

Range GBP/USD

1.5950-1.6050

1.5850-1.5950

1.6050-1.6150

Range GBP/PLN

5.3700-5.4100

5.3500-5.3900

5.3900-5.4300

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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